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Hi all,

My dad and I are looking to set up a family loan in Canada whereby I am essentially borrowing from my dad who is a retiree (he's looking to diversify his monthly income sources, and I'm willing to pay more than prevailing interest rates) and I am looking to invest it in high quality high income equities (essentially I earn the spread between my dividend income and the interest payments, and I keep the equity upside), win/win for both since I have a long-time horizon. Just a side note, I work in equity research with a major investment bank, so I fully understand the risks associated with what I am doing and he's a retired accountant, so he keeps me honest :).

I am just curious if anyone knows if I will have to create a T5 slip for my dad since I will be claiming interest paid as a deduction and he will be claiming interest received as income? CRA website doesn't have great info on this, at least I didn't have great luck in finding it - just want to be onside with the taxman. Thanks.

Kind Regards,

TJ
 

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I do not think that you need a T5 slip. My understanding is that each party has to declare the interest income/expense. It has to be reasonable. Have a demand note as proof. I suspect that CRA is far more interested that the number makes it on to each return. No different than what one would do if you held a private mortgage and were reporting the income.

This is how we have worked our spousal loans for the past ten years As per our accountant's direction. In our case we use the prescribed rate as at the date of the note.
 

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It's a loan so like Ian, I doubt a T5 slip is required. The T5 slip is for investment income like interest paid on deposits or GICs or dividends etc.

For example, I have a HELOC that is for an investment portfolio. All the mortgage company gives me are the monthly statements plus an annual statement of all interest paid. So far, I haven't been asked any questions but if CRA does ask, I have each year's annual statement as well as the bank account statements showing the payments made and any extra payments made.

AFAICT, in your case the key is for each of you to have documentation of the terms, each to report your part properly on the individual tax returns and have documentation/notes of the payments to make it traceable, if questions are asked. If it was me, I'd also keep a copy of the CRA mandated minimum interest amounts to be able to show the interest charged was greater. If you keep the documents electronically, it should be relatively easy to keep a complete set.


Cheers
 

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Our accountant strongly suggested two things. The first was to have a signed demand note as evidence of the date. The second was to keep proof of the transaction and interest paid or claimed simply by passing all payments through your bank account. Plus of course, if your loan is not at the lowest interest rate as prescribed by CRA then keep an eye out for interest rate decreases (spousal loans).

This is very straightforward and anything but onerous. We have been doing this for 15 years or so. I have no doubt that they match the interest expense that my spouse claims to the interest income that my spouse gives to me. In our case, our financial institution keeps track of the loan amounts, the interest, transfers the interest beween accounts each year in early Jan and gives us a letter outlining same that we keep with our tax records.
 
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